Fantastic video. Codie Sanchez introduced me to this concept, but you're really what I need. You're diving into the details that are actually needed to understand this fully. She's an influencer, but you're a real educator.
Watch the video again. The whole point is that this is next to impossible. Also, I made an error and didn’t include part of the debt service in the last example, so, it actually doesn’t work.
@@DavidCBarnett this is an interesting comment nearly 2 years later. yes i realize you made an error in the last section by not including the amoritization note of the ABL but the i think it still meets the criteria of 50% EBIDTA. of course 2 years ago you could also get a HELOC at 3% now it more like 7.5% which would tak you over that 50% threshold. thoughts?
Me too, lol... So of these "gurus" are heavy on the personality and oh so very light on facts, for example, Sanchez talks about how she was able to not these business for almost no money of her own, but barely mentioned the fact that she used to work for Goldman Sachs, sooooo she wasn't broke
But I did make a mistake and left out the debt service in the last example. So, even with all the 'right things' falling into place, it still likely won't work for anyone.
@DavidCBarnett Absolutely. There are so many unavoidable costs that most people don't mention. Like you said, It's possible. But, it's a hay in a needle stack situation 🤣🤣🤣.
I'm from Romania and I've made many mistakes in my life, I've often felt frustrated when I saw how many millionaires there are on CZcams, CZcams is filled with millionaires, 20 years ago I was delighted with business from the internet , and I lost my house in a bad deal. If you don't have experience in sales, finance, etc., then start with something small, I had to rebuild my life, build another house, provide something for the family, now I'm earning with a hard job in marine somewhere at 5-6000 euros per month, of course if I wanted to do something like business I would take it slower. Thank you for your honesty and frankness, it's something rare these days when many behave like mafiots !!!
Thanks David. A wealth of useful information here. Too many people think it's easy to buy a business with no money, and that is what makes them vulnerable to be exploited by those who are looking to line their own pockets by leading others into a situation that is not a viable one. Some people will listen, but there are always those who won't until they end up losing their money. Sad but true.
Thanks Victor. I've literally met close to a hundred people who've taken these programs and have been taught that 'asset based lenders' or 'private equity' or some other magical lender will provide all the money. They usually go and find me online after their guru has ghosted them.
Yes, but it doesn't work because in the last example I forgot to add the total cost of debt service. Watch it again, the purpose of the video is to demonstrate how this is a next to impossible to pull off.
What a great video. I love how you explain everything in detail. Not like the training scammers who never explain anything because “it will be learned on the course”. I feel bad for anyone who falls into their trap, mostly young people with big dreams. Those “courses” aren’t cheap. Really great stuff you have on your channel. I know what I’ll be doing over the next month 😂
Great information really well presented. Thank you for sharing. One aspect, I wish you would’ve covered was the economy and the pressure of owners, retiring, and willing to make seller financing more capable.
FYI - just commented on your other video. I know Codie Sanchez is one of the folks with a lot of the content out there. Most of what she puts out is fairly honest. The first thing she does is tell you you probably have to use your day job to build something up before you can do one of these deals, and your first deal HAS to be smaller, and HAS to be low risk. And to your point your existing business is a springboard to buying more businesses.
I have come across you via a Roland Frasier video. I watched this all the way through and you hit the nail on the head, with regards to how colleagues on the course I took did so well. They already had equity to play with. I am finding deals but I am going through the find an investor routine. Thank you for a most informative video.
I appreciate your support and good sentiments very much. The fact that you valued our content greatly means a lot to us. We're so happy to have you as a new subscriber and we hope you keep enjoying and gaining from the content we produce. Please let us know if you have any ideas or requests for future videos. Once more, many thanks for your help!
Man you are awesome. I am always very skeptical about everything I hear about CZcamsrs promising easy ways to make money and ran into this concept and said to myself, Man it can't be that easy.... And here I am learning new stuff from you. Thanks for being honest.
This stuff needs to be sold for a price as a course.... Damn good insight into acquisitions.... Thank you Any advice for a guy from India to do deals and move to America by buying an American business??
I’m in a scenario where the seller and I have done business together for decades and he asked me to buy his business. This “buying from family or friends” would apply I believe
So refreshing to see this video David. As I go down the initial stages of looking to buy a business, what is perplexing to me is that none of the books I've read ever really do the math on this properly.....its like they almost avoid providing the numbers. If they do provide numbers its very superficial and never fully explains the likely 'real outcomes' experienced by prospective buyers.
Thank you David for your knowledge and experience with this space. I am currently in the process of learning ways to acquire my first acquisition, and I found your video to be very informative! I plan to watch all your videos before making any decisions! TIA!
Thank you for this video David! It was a bit of a slow ride to get to the punch line but this affirms my thoughts exactly on buying a small business. I will be using this information in the future.
Thanks for the video David. I think the % of EBITDA formula is wrong, though. I think it's referencing the $400k of equipment as the denominator rather than the $200k of EBITDA. Reasonableness check: $45k of debt service is higher than 11% of $200k.
I forgot to include some of the debt service in the last scenario. see the pinned comment at the top. In the end.... this is a painfully awful thing to try and pull off and then run successfully.
great video but your math was off on model two and three total debt services you mentioned you thought it would be higher and it is you did not add the abl to the total same in the next one you did not add the first column to the others. but still great job
Fanastic video. Thanks for sharing real world information. All too often people want to sell the fairy tale, and the fairy tale story is always better than the real world story, but its a fairy tale.
Great stuff David, so tired of these "no-money-down" clowns feeding of people's desire for a free lunch. Would be great to see another breakdown like this, perhaps for a distressed business. (You may have a video on that already so my apologies if you have done that already) Cheers!
8:22 "Our line of credit is never amortized... lines of credit to finance inventory.. they never pay them off ... they just just revolve the line of credit" This makes sense on how it boosts the bottom line... But if the principle is never paid to the lender... How does the lender make money?
The interest. For example, if you borrow $100,000 on a line of credit at 5% interest for a year and never pay down the principle, you end up paying $5,000 in interest over the course of the year. The interest is a business expense so it lowers your tax bill. Financing your inventory like this does not 'boost the bottom line' it lowers profit. What it boosts is the Return on Equity. The % earnings on your own money invested in the business.
Great advice and analysis. First time I watched your video. Yes, I agree that the people selling these "No Money Deals" courses for businesses and for a property are not telling people the whole truth. If they did, nobody would buy their courses. The other truth is that most of these businesses for sale are not profitable enough. People lie about why they are really selling. Most people will burn their fingers if they do not have a lot of business experience. Especially financial experience. PS: Can you make the spreadsheet available?
Yes, people are always downplaying the importance of experience. Business is risky. If you really want to up your spreadsheet game, visit www.BizPlanSchool.com I always recommend starting from scratch and that's what I teach there.
Hi David, well done on a well put together video. I have given you a thumbs down only because I don’t agree with everything that you said on the video. It is possible to buy companies no money down or rather no money in from strangers, as you put it, because I have done it. I’d be very happy to explain how. Secondly, it is possible for people with no money (due to misfortune) to achieve a no money in deal. The absolutely crucial thing, however, is what they do with the business afterwards. And that’s where the problems can arise. I don’t know which “gurus” You were referring to, but several of them make me shudder as well. Like you, I pride myself on the nitty-gritty not awfully theory. I’d be happy to debate the topic with you.
I tried to post this as a comment, but for whatever reason, my youtube account is acting up and self-deleting comments, so I'm going to post the comment right here as a reply: Hey David, I could tell you put a lot of effort into the video. I still disagree though with the premise. There's a whole industry of individuals who are broke buying businesses who either use a search fund or go the traditional fundless sponsor route while using none of their own money. Although you could just get an LP to put in the capital and still consider it "zero down" from the sponsors perspective. This can be done while you get some carried interest as a fundless sponsor to close the deal. But, I will presume that you want to do it with no equity from anyone, not even an investor. Let's add some zeros on it because the deal is far too small to get institutional financing. Purchase Price: $12,000,000 EBITDA: $4,000,000 Tangibles and Inventory: $10,000,000 Still the same multiples, just a larger size. $7,500,000 in senior debt. Amortized over 7 years with an interest rate of 4%. $2,000,000 in mezzanine. 10% interest rate, but only 5% will be paid every year, the rest will be put into the PIK. When the note matures it turns into a senior note amortized over 3 years at a 4% interest rate. The Mezz note will mature in 7 years, with another 3 years of amortization after in senior form, making for a uni-tranche loan with a term of 10 years. $3,000,000 in seller finance. 7% interest rate, with a PIK for all of the interest and principal 10 years after closing. First lien: Senior Second lien: Mezzanine Third lien: Seller Note The debt to equity ratio from the perspective of the senior lender is 1.25 because the mezzanine lender and seller notes are considered equity, and I also added the operating capital into the equity calculation. From the perspective of the mezzanine lender, it's a debt to equity ratio of 1.583. The seller is basically the equity injection here, but they should be okay with this structure because they are getting 75% cash at closing. The monthly payment on the senior debt is $102,516.05. Annualized that is $1,230,192.60. We need to at the interest on the Mezz to this. The interest on the Mezz is $100,000. This is an annual debt service of $1,330,192.60 This is a DSCR of over 3. Am I getting something wrong in these calculations? Because it seems as though it could be done zero down in this situation. Regardless, you can always make it "zero down" by not adding any of your own money, but having an LP put in equity if needed.
How many times have you done it? I work with people who do deals all the time, have yet to meet anyone who has done this precisely as you describe. I have met many people with no money who work tirelessly for years trying to pull it off, however. Holding up very rare circumstances as a normal and achievable outcome is called going on a unicorn hunt. Watch this video: czcams.com/video/NrHqtOWVE9g/video.html This channel is about Main St. deals that are actually doable by the average person who wants to get into business via acquisition instead of facing the risk of a startup. In the scenario you mention in your comment, the buyer would have to have an amazing pedigree of leadership experience in the industry in order to get the PE group and Bank on board. The Bank would normally want to see the availability of further resources should something go wrong, again... unlikely that the buyer would be a broke person... or the PE firm would need to be involved in guaranteeing the senior debt somehow. PE firm would definitely be in a position here to take control if something went wrong. Although the notion that this is doable is very alluring, especially for someone who feels like they just can't get ahead. These are the victims of the 'no-money down gurus' or 'One-Pound Charlies.' Rare for a bank to go to 75% LTV with only collateral... maybe 50% of very durable assets like real estate.
@@Pernection You're not the only one. It either doesn't actually make sense at all or it's too complicated for the average person who wants to buy a business. Either way, explaining something in a way that is not understandable to the people it's meant for is of dubious value.
Thank you for this! Is ABL with seller financing the tactic that Dan Peña is touting to close deals with his QLA method? He mentions something about a double closing, but has never gone into specifics. Can you talk about ABL or doing a deal that involves collateralizing the commercial real estate owned by the business?
Asset based lending is not a solution for buying a business. Watch the full series of videos and read the articles here: www.investlocalbook.com/p/buy-business-with-no-money.html The machinery as collateral video explains the problem with ABL but it fits into the context of the rest so please watch all the vids. Cheers Hailey.
I was inspired by Roland Frasier to look into this business-buying idea. I was already getting emails from Jeremy Harbour but mostly not reading them. Then I read Mergers and Acquisitions for Dummies and I am reading it again and I will keep reading it. My question is, is M&A for Dummies good reading for a 13-year-old girl I know? I bought a second copy but haven't given it to her yet. I have lent it to a friend who, like me, is a BTL landlord. I have four houses, and he has more but all his are mortgaged. Two of my four are not. I am getting my two unencumbered houses ready to rent and then mortgaging them so I have the capital to invest in a glazing business. What do you think?
@@DavidCBarnett The only way to find out if she is interested is to offer the book to her and see what she makes of it. She has plenty of time to grow into it and decide if any part of M&A is for her. At least it would demystify a part of society that is less well-understood if she read it and understood it. If she gets good at it I might be able to call on her services in the future.
@@DavidCBarnettI think it would be best to buy a company I can afford for cash with some money left over but get the owner to keep some skin in the game one way or another. I will have the mortgage money from two presently unencumbered rental houses after I fix them up and rent them out. I already have rents from two rentals coming in and my pension. I have a lot of decluttering to do then sorting and selling much of the clutter. And I am getting back into doing house and garden clearance. At 75 with bad knees, it isn't easy but not impossible either. There is a company I fancy for about £77k and £800 per month rent on the industrial unit. I don't have the EBITDA etc and it might be sold before I am ready. I will keep reading the Dummies book and doing the decluttering etc. Any and all advice appreciated.
Most people with bad credit score have very little/no accumen of running a business in a proper way & ruin the goodwill of anything they operate. If generating passive income is the end goal of a seller, why take that huge of a risk? What happens if the poor credit rated buyer you sold to, ran the customer service of the business to the ground & folds his operations within a year? Is that 10/15/20/25% return worth taking the risk of having no goodwill left by the end of the year? It'd make much more sense to charge an interest a bit above a 30 year treasury, get into a profit sharing agreement and sell to a buyer who has a high credit score & good business accumen.
Yes, yes, and yes. The point of the video is to show 'no money bros' just how difficult it would ever be to pull this off.. see more here: www.investlocalbook.com/p/buy-business-with-no-money.html
Great presentation. Very optimistic on costs of financing a business purchase. However, when I re-created your spreadsheet, step by step while rewatching the video, my numbers were very different. When you expanded your grid to add ABL, you did not expand your "Debt Service" capture formula area as well, so it was not capturing the $54k expenses of the annual ABL payments. Forgive me if I'm wrong, I'm new to this type of endeavor, but should the ABL also be included in the the overall Debt Service? Which then effects the DSCR and the EBITDA? When I do the math, you have made the assumption that "Wayne's" business in making $200,000 NOI? Is that an average number for a $600k business?
Yeah, that's an error that others caught as well, I forgot to count some of the debt service. The whole point of the video is that it's next to impossible to pull off and if you count all the debt service, it just doesn't work.
Would the bank need to look at your credit score in this scenario? As it would be the company who are taking on the debt from the bank or ABL's. Thanks
The assumption at all times with business deals and business credit is that the buyer's credit is PERFECT. If you can't run your household properly, how are you going to demonstrate your ability to run a business?
The only way the DSCR will work is if you have access to cheaper capital, that means a bank. Show me a bank that will lend to a buyer with no skin in the game.
I was actually doing some research into this and I found this video of Dan Pena saying you can use seller financing as a down payment if the numbers are good enough. Would this work in the real world?
I've seen some banks accept a seller note with a 5-year delay in principal payments as a COMPONENT of the equity in calculating the required debt to equity ratio. But the buyers had to have some amount of down payment to do this AND demonstrate other resources they had available to put into the business if things didn't go as planned. Again, this is a tactic that a person with money can use to go further... unlikely a broke person could use this to scratch together a no money, no resources deal for themselves. Also, you need a seller to agree to allow his note to be interest-only for 60 months (at least) and to wait until the bank says it's ok to start making principal payments.
Hi Mr. David. What are your thoughts on QLA methodology taught by Dan Pena? Is it possible buying a business with no money down using the method he teaches?
Watch/read everything here: www.investlocalbook.com/p/buy-business-with-no-money.html I've addressed this question in one of the videos but they're better to watch in order.
Nice work David! Are banks actually fractional reserve lenders or are they able to create credit out of thin air on a computer screen if they deem customers credit worthy?
The reserve ratio is now 0 in most western countries, so yes, they make money. BUT any losses are still losses and come out of their equity so there is a 'governor' on this aspect of the commercial banking system. They can still go bankrupt if they make too many bad loans.
Is it possible to raise money for a down payment from angel investors, search funds or any other funding channel, and then use the bank to finance the rest ? I’m new to this, still learning.
Yes, that's called 'raising equity investment.' some banks have rules about it. Go meet a banker and tell them what you plan to do and get their feedback. Their job is to find good loans, they'll tell you what they can and can't do.
Min 17:48 Im surprised you don't know about fractional reserve and loans. Banks only lend a small fraction of " your neighbor" deposit, the main part is money creation. This new money created is then offset when we repay the loan.... Banks have 0 risk. Because if you default you loan payment gouvernement or CB will buy bad assets
I understand fractional reserve banking very well. It's why I said that asset based lenders have to charge more, they have to actually have the money. The fractional reserve system lets the banks earn more, but also creates leverage within themselves. Any losses come out of their capital and those losses have been magnified by the fractional reserve. This is how banks collapse in a downturn. Also, after the 2008 crisis, most governments changed bank rules to allow 'bail ins' so that next time, they can choke some losses onto depositors just like Cyprus sort of did.
I'll watch this later but I have 17k that's all I got if I wanted to buy a business so I could quit my job how could I do it never owned anything before is there a way I don't have a very rich friend I don't have great salesmanship experience how would someone like me start I live in Vermont not allot of opportunities here .
Great video, David. What if sellers' good will is 400k with 5% interest, bank loan is 150k and buyers investment is 50k? Would that go through with the bank?
Banks typically like to see a minimum debt to equity ratio, in this scenario, you may be able to split the seller note into two parts and have one note wait for payments until the bank gives the ok. This makes it act like equity. It's called a postponement.
I help people analyze deals. There are brokers who work for sellers that will take you through the process... BUT- the assumption from every person is that if you're going to be doing business, you're a 'businessperson.' That means you have to be confident in your own skills and abilities. There are NO consumer protections in this world.
Hi David, So is this only for $0 money down that you wouldn’t recommend buying a business if you’re broke or would this also apply to someone who has saved $10K or $20K and wants to buy a small business for $100K with a SBA loan?
I also don't recommend putting all your cash into a deal. This video is intended to show how hard it might be. Also, I made an error in the last scenario, I forgot to include some of the debt service, so even the last scenario doesn't really work. see the top pinned comment.
Not sure what you mean by local tax implications. You're facing income and maybe capital gains taxes in most countries. You'd need to run your idea past a local qualified accountant to find out where there may be tax liabilities and for which party. Also asset vs share deals have different implications in most countries.
It’s not a template. I just built it on the fly. If you want to develop skills for stuff like this, sign up for the cash flow forecasting program at www.BizPlanSchool.com
This was the video I was looking for. That said, I still do not understand this video: perhaps you can explain it. czcams.com/video/F8o1fZQ-Wlc/video.html. The first minute he talks about how he puts 15k down, and the seller financed 70k. What does that actually mean and how is that done?
Fantastic video. Codie Sanchez introduced me to this concept, but you're really what I need. You're diving into the details that are actually needed to understand this fully. She's an influencer, but you're a real educator.
Watch the video again. The whole point is that this is next to impossible. Also, I made an error and didn’t include part of the debt service in the last example, so, it actually doesn’t work.
@@DavidCBarnett this is an interesting comment nearly 2 years later. yes i realize you made an error in the last section by not including the amoritization note of the ABL but the i think it still meets the criteria of 50% EBIDTA. of course 2 years ago you could also get a HELOC at 3% now it more like 7.5% which would tak you over that 50% threshold. thoughts?
@@DavidCBarnett also wanted to thank you for the spreadsheet setup. nice little tool
@@DavidCBarnettI don’t understand which part did you forget to add the debt service?
Me too, lol... So of these "gurus" are heavy on the personality and oh so very light on facts, for example, Sanchez talks about how she was able to not these business for almost no money of her own, but barely mentioned the fact that she used to work for Goldman Sachs, sooooo she wasn't broke
I mean this video is worth a week of my time searching for the right information. Indispensable.
Thanks
I like how you explain how even a bank is a business and they aren't always the bad guy.
Thanks S.
No lies were told in the making of this video 🎯
But I did make a mistake and left out the debt service in the last example. So, even with all the 'right things' falling into place, it still likely won't work for anyone.
@DavidCBarnett Absolutely. There are so many unavoidable costs that most people don't mention. Like you said, It's possible. But, it's a hay in a needle stack situation 🤣🤣🤣.
I'm from Romania and I've made many mistakes in my life, I've often felt frustrated when I saw how many millionaires there are on CZcams, CZcams is filled with millionaires, 20 years ago I was delighted with business from the internet , and I lost my house in a bad deal. If you don't have experience in sales, finance, etc., then start with something small, I had to rebuild my life, build another house, provide something for the family, now I'm earning with a hard job in marine somewhere at 5-6000 euros per month, of course if I wanted to do something like business I would take it slower. Thank you for your honesty and frankness, it's something rare these days when many behave like mafiots !!!
Thank you for this. I'm trying to give people a realistic perspective. It's easy to get excited sometimes when you want to believe stuff online.
Very honest person I ever see in CZcams...Thank you David.! Great info..!
I appreciate that! Thnaks Murali.
I was about to pay for codie Sanchez's course. I'm glad I ran into this. Now I know better how to position myself. Thank you.
I'm here to teach. Cheers.
Good move.
Thanks David. A wealth of useful information here. Too many people think it's easy to buy a business with no money, and that is what makes them vulnerable to be exploited by those who are looking to line their own pockets by leading others into a situation that is not a viable one. Some people will listen, but there are always those who won't until they end up losing their money. Sad but true.
Thanks Victor. I've literally met close to a hundred people who've taken these programs and have been taught that 'asset based lenders' or 'private equity' or some other magical lender will provide all the money. They usually go and find me online after their guru has ghosted them.
I usually never comment on videos but this one definitely deserves it. Phenomenal job putting this together. Keep up the great work.
Much appreciated!
great video thank you for the free information. it protects people like me that are just getting started.
Thanks for th ekind words CPW.
Exactly what I was searching for. The logistics or mechanisms surrounding the structure. Perfectly depicted.
Yes, but it doesn't work because in the last example I forgot to add the total cost of debt service. Watch it again, the purpose of the video is to demonstrate how this is a next to impossible to pull off.
Great advise. Thanks for showing all the nuts and bolts of the deal. Like you say, not to be done by broke people.
Glad to help
What a great video. I love how you explain everything in detail. Not like the training scammers who never explain anything because “it will be learned on the course”. I feel bad for anyone who falls into their trap, mostly young people with big dreams. Those “courses” aren’t cheap. Really great stuff you have on your channel. I know what I’ll be doing over the next month 😂
Welcome aboard Ve Ve. Good to have a new viewer. Cheers.
Great information really well presented. Thank you for sharing.
One aspect, I wish you would’ve covered was the economy and the pressure of owners, retiring, and willing to make seller financing more capable.
There have always been way more buyers than sellers of Good businesses. The retirement wave of boomers hasn't changed this.
FYI - just commented on your other video. I know Codie Sanchez is one of the folks with a lot of the content out there. Most of what she puts out is fairly honest. The first thing she does is tell you you probably have to use your day job to build something up before you can do one of these deals, and your first deal HAS to be smaller, and HAS to be low risk. And to your point your existing business is a springboard to buying more businesses.
yes, good points.
I have come across you via a Roland Frasier video. I watched this all the way through and you hit the nail on the head, with regards to how colleagues on the course I took did so well. They already had equity to play with. I am finding deals but I am going through the find an investor routine. Thank you for a most informative video.
Make sure you read the pinned comment.
i too bought Roland Frasier's course. Was it a scam?
Thank you for sharing. I have learned a lot in 40mins than in 2 yrs of studying Certified Public Accountants enrollment. God Bless you 🎉❤
Really? Maybe I should open an accounting school...
@@DavidCBarnett May be you should. Maybe check conference about small business ownership and Acquisitions 👏
Great for opening my eyes as I was fouled by no money down guru course on internet…. Great Jobs
Thanks for sharing Joe. Many people feel embarrased and never say anything afterwards.
This was GOLD. Thank you Wayne for the comment which spun off this video by David. I appreciate this video, thank you as well David. - 7/12/22
Glad you enjoyed it
Thank you for explaining this very clearly and in an honest way!
You're welcome.
Very timely for me. I own several businesses and I'm buying a Fedex Route business.
Thanks TD.
Thats awesome!
That was solid! Thanks. I agree, 100% only seller financing is difficult for buyers w limited financial resources.
Exactly.
Just discovered this channel and am already VERY greatful for this content. Subscribing and watching everything!
I appreciate your support and good sentiments very much. The fact that you valued our content greatly means a lot to us. We're so happy to have you as a new subscriber and we hope you keep enjoying and gaining from the content we produce. Please let us know if you have any ideas or requests for future videos. Once more, many thanks for your help!
Man you are awesome. I am always very skeptical about everything I hear about CZcamsrs promising easy ways to make money and ran into this concept and said to myself, Man it can't be that easy.... And here I am learning new stuff from you. Thanks for being honest.
No problem. It's like unicorn hunting... the first step is wanting to believe. LOL
Glad I watched til the end! The power of focusing on a niche is that it will be easier to get financing from the bank when you are ready to roll up!
Yes, and it will be easier for you to analyzie a business that you know something about.
@@DavidCBarnett do you have a spreadsheet you can share for evaluation?
@@livingingreenvillenc6904 I don't, I use a licensed tool which you can find here: www.fat-software.com/
@@DavidCBarnett thanks
This stuff needs to be sold for a price as a course.... Damn good insight into acquisitions.... Thank you
Any advice for a guy from India to do deals and move to America by buying an American business??
I made a video about that. czcams.com/video/tRGW56_DYAI/video.html
I’m in a scenario where the seller and I have done business together for decades and he asked me to buy his business. This “buying from family or friends” would apply I believe
For sure. Different set of rules in a case like that becuase the buyer and seller have greater knowledge and an established trusting relationship.
One of the best value videos I’ve found on this topic. I can’t thank you enough.
Cheers
So refreshing to see this video David. As I go down the initial stages of looking to buy a business, what is perplexing to me is that none of the books I've read ever really do the math on this properly.....its like they almost avoid providing the numbers. If they do provide numbers its very superficial and never fully explains the likely 'real outcomes' experienced by prospective buyers.
Yes, but see the pinned comment. The last scenario doesn't work either, I forgot the debt service. The reality is that this is all hopium.
Hi David, just found your channel. I paid to learn about LBO's and you definitely go into more detail!! I wish i had found your channel before.
Glad it was helpful!
Amazing details others aren't talking about. Thanks for the info and time you put into this!
Yeah, just read the first comment.
Great information. Thanks
Cheers.
Thanks David!
Cheers. Make sure to see the pinned comment. It doesn't actually work, I forgot to include part of the debt service in the last example.
Thank you David for your knowledge and experience with this space. I am currently in the process of learning ways to acquire my first acquisition, and I found your video to be very informative! I plan to watch all your videos before making any decisions! TIA!
You are very welcome
Solid content
Thanks
understanding from the bank's perspective was very interesting! Thanks for your great content, David!
Glad you enjoyed it!
Thank you for this. Knowing these details helps me to know what path to take.
Glad it was helpful Damian.
Thank you for this video David! It was a bit of a slow ride to get to the punch line but this affirms my thoughts exactly on buying a small business. I will be using this information in the future.
Glad it was helpful!
Thanks for the video David. I think the % of EBITDA formula is wrong, though. I think it's referencing the $400k of equipment as the denominator rather than the $200k of EBITDA. Reasonableness check: $45k of debt service is higher than 11% of $200k.
I forgot to include some of the debt service in the last scenario. see the pinned comment at the top. In the end.... this is a painfully awful thing to try and pull off and then run successfully.
So well presented! I wish I could get access to mentor like yourself here in Perth 🇦🇺
I've had 3-4 clients in Perth over the years. I work with people all over.
Thanks David I really needed this information.
Glad it was helpful!
Excellent information great details and direct without the run around.
Thanks Leo
great video but your math was off on model two and three total debt services you mentioned you thought it would be higher and it is you did not add the abl to the total same in the next one you did not add the first column to the others. but still great job
Yes, see the pinned comment. There is an error and, in fact, the last scenario doesn't work either.
New to the channel and loving it. Are you willing to share this excep sheet?
No, because it doesn't work. See the pinned comment.
Ghram Billey act prohibits banks from using customer deposits to invest or create loans
Really appreciate your no bs approach and getting into the details... So maybe of those "gurus" just want you sell you hopes and programs
It's a drug called 'Hopium.' Very dangerous.
Fanastic video. Thanks for sharing real world information. All too often people want to sell the fairy tale, and the fairy tale story is always better than the real world story, but its a fairy tale.
True.
Great video! Much appreciated!!
Thanks
Great stuff David, so tired of these "no-money-down" clowns feeding of people's desire for a free lunch. Would be great to see another breakdown like this, perhaps for a distressed business. (You may have a video on that already so my apologies if you have done that already) Cheers!
Great Idea! I'll add this to my list.
What a reality check!
I do my best.
I a tually LOLed at the "imagine the banker" (as the Monopoly character) bit
When I see one who looks like that, I'm gonna take a picture.
8:22 "Our line of credit is never amortized... lines of credit to finance inventory.. they never pay them off ... they just just revolve the line of credit"
This makes sense on how it boosts the bottom line... But if the principle is never paid to the lender...
How does the lender make money?
The interest. For example, if you borrow $100,000 on a line of credit at 5% interest for a year and never pay down the principle, you end up paying $5,000 in interest over the course of the year. The interest is a business expense so it lowers your tax bill.
Financing your inventory like this does not 'boost the bottom line' it lowers profit. What it boosts is the Return on Equity. The % earnings on your own money invested in the business.
Great advice and analysis. First time I watched your video. Yes, I agree that the people selling these "No Money Deals" courses for businesses and for a property are not telling people the whole truth. If they did, nobody would buy their courses. The other truth is that most of these businesses for sale are not profitable enough. People lie about why they are really selling. Most people will burn their fingers if they do not have a lot of business experience. Especially financial experience. PS: Can you make the spreadsheet available?
Yes, people are always downplaying the importance of experience. Business is risky.
If you really want to up your spreadsheet game, visit www.BizPlanSchool.com I always recommend starting from scratch and that's what I teach there.
This is fantastic information, thank you
thanks
Thank you for making this video. Please keep making great content.
Thanks, will do!
Amazing! Can't thank you enough
see the first comment. Even the last scenario really doesn't work
Great video David 👍 very informative 🇯🇲🇯🇲🇯🇲
Thanks
Hi David, well done on a well put together video. I have given you a thumbs down only because I don’t agree with everything that you said on the video. It is possible to buy companies no money down or rather no money in from strangers, as you put it, because I have done it. I’d be very happy to explain how. Secondly, it is possible for people with no money (due to misfortune) to achieve a no money in deal. The absolutely crucial thing, however, is what they do with the business afterwards. And that’s where the problems can arise. I don’t know which “gurus” You were referring to, but several of them make me shudder as well. Like you, I pride myself on the nitty-gritty not awfully theory. I’d be happy to debate the topic with you.
Agreed!
I tried to post this as a comment, but for whatever reason, my youtube account is acting up and self-deleting comments, so I'm going to post the comment right here as a reply:
Hey David, I could tell you put a lot of effort into the video.
I still disagree though with the premise.
There's a whole industry of individuals who are broke buying businesses who either use a search fund or go the traditional fundless sponsor route while using none of their own money. Although you could just get an LP to put in the capital and still consider it "zero down" from the sponsors perspective. This can be done while you get some carried interest as a fundless sponsor to close the deal. But, I will presume that you want to do it with no equity from anyone, not even an investor.
Let's add some zeros on it because the deal is far too small to get institutional financing.
Purchase Price: $12,000,000
EBITDA: $4,000,000
Tangibles and Inventory: $10,000,000
Still the same multiples, just a larger size.
$7,500,000 in senior debt. Amortized over 7 years with an interest rate of 4%.
$2,000,000 in mezzanine. 10% interest rate, but only 5% will be paid every year, the rest will be put into the PIK. When the note matures it turns into a senior note amortized over 3 years at a 4% interest rate. The Mezz note will mature in 7 years, with another 3 years of amortization after in senior form, making for a uni-tranche loan with a term of 10 years.
$3,000,000 in seller finance. 7% interest rate, with a PIK for all of the interest and principal 10 years after closing.
First lien: Senior
Second lien: Mezzanine
Third lien: Seller Note
The debt to equity ratio from the perspective of the senior lender is 1.25 because the mezzanine lender and seller notes are considered equity, and I also added the operating capital into the equity calculation.
From the perspective of the mezzanine lender, it's a debt to equity ratio of 1.583.
The seller is basically the equity injection here, but they should be okay with this structure because they are getting 75% cash at closing.
The monthly payment on the senior debt is $102,516.05. Annualized that is $1,230,192.60. We need to at the interest on the Mezz to this. The interest on the Mezz is $100,000. This is an annual debt service of $1,330,192.60
This is a DSCR of over 3.
Am I getting something wrong in these calculations? Because it seems as though it could be done zero down in this situation.
Regardless, you can always make it "zero down" by not adding any of your own money, but having an LP put in equity if needed.
@@RomilCPatel I wish I understood all that.
How many times have you done it? I work with people who do deals all the time, have yet to meet anyone who has done this precisely as you describe. I have met many people with no money who work tirelessly for years trying to pull it off, however.
Holding up very rare circumstances as a normal and achievable outcome is called going on a unicorn hunt. Watch this video: czcams.com/video/NrHqtOWVE9g/video.html
This channel is about Main St. deals that are actually doable by the average person who wants to get into business via acquisition instead of facing the risk of a startup.
In the scenario you mention in your comment, the buyer would have to have an amazing pedigree of leadership experience in the industry in order to get the PE group and Bank on board. The Bank would normally want to see the availability of further resources should something go wrong, again... unlikely that the buyer would be a broke person... or the PE firm would need to be involved in guaranteeing the senior debt somehow. PE firm would definitely be in a position here to take control if something went wrong.
Although the notion that this is doable is very alluring, especially for someone who feels like they just can't get ahead. These are the victims of the 'no-money down gurus' or 'One-Pound Charlies.'
Rare for a bank to go to 75% LTV with only collateral... maybe 50% of very durable assets like real estate.
@@Pernection You're not the only one. It either doesn't actually make sense at all or it's too complicated for the average person who wants to buy a business. Either way, explaining something in a way that is not understandable to the people it's meant for is of dubious value.
Mind blowing… David thank you
Cheers
Thank you for this! Is ABL with seller financing the tactic that Dan Peña is touting to close deals with his QLA method? He mentions something about a double closing, but has never gone into specifics. Can you talk about ABL or doing a deal that involves collateralizing the commercial real estate owned by the business?
Asset based lending is not a solution for buying a business. Watch the full series of videos and read the articles here: www.investlocalbook.com/p/buy-business-with-no-money.html The machinery as collateral video explains the problem with ABL but it fits into the context of the rest so please watch all the vids. Cheers Hailey.
Thanks for advice David.
Thanks for watching Chief.
Thank you so much!
You're welcome!
Great advice. Thanks 👍
Thanks
I was inspired by Roland Frasier to look into this business-buying idea. I was already getting emails from Jeremy Harbour but mostly not reading them. Then I read Mergers and Acquisitions for Dummies and I am reading it again and I will keep reading it. My question is, is M&A for Dummies good reading for a 13-year-old girl I know? I bought a second copy but haven't given it to her yet. I have lent it to a friend who, like me, is a BTL landlord. I have four houses, and he has more but all his are mortgaged. Two of my four are not. I am getting my two unencumbered houses ready to rent and then mortgaging them so I have the capital to invest in a glazing business. What do you think?
I've never read that book. Is the girl interested in these subjects? I don't know many teenagers who are.
@@DavidCBarnett The only way to find out if she is interested is to offer the book to her and see what she makes of it. She has plenty of time to grow into it and decide if any part of M&A is for her. At least it would demystify a part of society that is less well-understood if she read it and understood it. If she gets good at it I might be able to call on her services in the future.
Interesting powerful points here , whats your opinion on QLA
I know you know who this is
I've made whole videos of my opinion of QLA. see it here: czcams.com/video/nBoNclTg3nE/video.html
Does this mean that Jeremy Harbour and Roland Frasier and possibly others are talking BS?
I've met many victims of zero-down gurus. See this page: www.investlocalbook.com/p/buy-business-with-no-money.html
@@DavidCBarnettI think it would be best to buy a company I can afford for cash with some money left over but get the owner to keep some skin in the game one way or another. I will have the mortgage money from two presently unencumbered rental houses after I fix them up and rent them out. I already have rents from two rentals coming in and my pension. I have a lot of decluttering to do then sorting and selling much of the clutter. And I am getting back into doing house and garden clearance. At 75 with bad knees, it isn't easy but not impossible either. There is a company I fancy for about £77k and £800 per month rent on the industrial unit. I don't have the EBITDA etc and it might be sold before I am ready. I will keep reading the Dummies book and doing the decluttering etc. Any and all advice appreciated.
Thank you David
Thanks for watching Pappa
Thanks for the info!
You bet!
Good info thanks
Glad it was helpful!
What about using an FBA loan where the buyer brings 5% and you have an outside source fund the other 5%
5% is not 'Zero Down'
So you need to be wealthy to get wealthy?
No, you need to know how to take care of money and live below your means. Otherwise, increasing your income will just make your problems worse.
Thanks David
You're welcome Jason.
great video but banks are 100% not interested in helping out anyone.
Most people with bad credit score have very little/no accumen of running a business in a proper way & ruin the goodwill of anything they operate.
If generating passive income is the end goal of a seller, why take that huge of a risk? What happens if the poor credit rated buyer you sold to, ran the customer service of the business to the ground & folds his operations within a year? Is that 10/15/20/25% return worth taking the risk of having no goodwill left by the end of the year?
It'd make much more sense to charge an interest a bit above a 30 year treasury, get into a profit sharing agreement and sell to a buyer who has a high credit score & good business accumen.
Yes, yes, and yes. The point of the video is to show 'no money bros' just how difficult it would ever be to pull this off.. see more here: www.investlocalbook.com/p/buy-business-with-no-money.html
Great Video!
Thanks for the visit Kevin!
Great presentation. Very optimistic on costs of financing a business purchase. However, when I re-created your spreadsheet, step by step while rewatching the video, my numbers were very different. When you expanded your grid to add ABL, you did not expand your "Debt Service" capture formula area as well, so it was not capturing the $54k expenses of the annual ABL payments. Forgive me if I'm wrong, I'm new to this type of endeavor, but should the ABL also be included in the the overall Debt Service? Which then effects the DSCR and the EBITDA? When I do the math, you have made the assumption that "Wayne's" business in making $200,000 NOI? Is that an average number for a $600k business?
Yeah, that's an error that others caught as well, I forgot to count some of the debt service. The whole point of the video is that it's next to impossible to pull off and if you count all the debt service, it just doesn't work.
Does seller financing typically involve personal guarantees by the buyer? What other options might there be to satisfy the buyer?
They always ask for it.
At 32:03 isn't that math wrong. You didn't take into account the ABL debt service...
You are correct, see the pinned comment.
The deal never works... EVER! That's the point... it's next to impossible to pull it off.
No one is addressing, what happens, if you have bad credit, from a company you previously owned, and doing owner finance.
Great question. Watch for this in a new video soon.
I didn't get why last example is only 45k, shouldn't that be 99k instead?
see the pinned comment. I made an error in adding up all the finance charges. the last example doesn't work either.
Would the bank need to look at your credit score in this scenario? As it would be the company who are taking on the debt from the bank or ABL's. Thanks
The assumption at all times with business deals and business credit is that the buyer's credit is PERFECT. If you can't run your household properly, how are you going to demonstrate your ability to run a business?
I need someone to teach the process step by step
The point of the video is that it's as easy to do as hunting a unicorn.
But no money down house buying is real , it can be done with difficulty though with business with good DSCR?
The only way the DSCR will work is if you have access to cheaper capital, that means a bank.
Show me a bank that will lend to a buyer with no skin in the game.
I was actually doing some research into this and I found this video of Dan Pena saying you can use seller financing as a down payment if the numbers are good enough. Would this work in the real world?
I've seen some banks accept a seller note with a 5-year delay in principal payments as a COMPONENT of the equity in calculating the required debt to equity ratio. But the buyers had to have some amount of down payment to do this AND demonstrate other resources they had available to put into the business if things didn't go as planned. Again, this is a tactic that a person with money can use to go further... unlikely a broke person could use this to scratch together a no money, no resources deal for themselves. Also, you need a seller to agree to allow his note to be interest-only for 60 months (at least) and to wait until the bank says it's ok to start making principal payments.
As a fellow brokey, it would’ve been nice to lead with the hard truth of “broke people don’t get 100% financing.” 😂😂 Great video
But then you wouldn't have time to watch any of the ads.
So you can't get 100% Seller finance if you don't have any money at all
Hi Mr. David. What are your thoughts on QLA methodology taught by Dan Pena? Is it possible buying a business with no money down using the method he teaches?
Watch/read everything here: www.investlocalbook.com/p/buy-business-with-no-money.html I've addressed this question in one of the videos but they're better to watch in order.
You are a hero
Not really, see the pinned comment. I forgot the debt service on the last scenario... it doesn't work either. The concept is totally unrealistic.
Nice work David!
Are banks actually fractional reserve lenders or are they able to create credit out of thin air on a computer screen if they deem customers credit worthy?
The reserve ratio is now 0 in most western countries, so yes, they make money. BUT any losses are still losses and come out of their equity so there is a 'governor' on this aspect of the commercial banking system. They can still go bankrupt if they make too many bad loans.
@@DavidCBarnett Unless, of course, if they get bailed out by the US taxpayer again.
Do you have this example with real estate?
Is it possible to raise money for a down payment from angel investors, search funds or any other funding channel, and then use the bank to finance the rest ? I’m new to this, still learning.
Yes, that's called 'raising equity investment.' some banks have rules about it. Go meet a banker and tell them what you plan to do and get their feedback. Their job is to find good loans, they'll tell you what they can and can't do.
Min 17:48 Im surprised you don't know about fractional reserve and loans. Banks only lend a small fraction of " your neighbor" deposit, the main part is money creation. This new money created is then offset when we repay the loan.... Banks have 0 risk. Because if you default you loan payment gouvernement or CB will buy bad assets
I understand fractional reserve banking very well. It's why I said that asset based lenders have to charge more, they have to actually have the money. The fractional reserve system lets the banks earn more, but also creates leverage within themselves. Any losses come out of their capital and those losses have been magnified by the fractional reserve. This is how banks collapse in a downturn.
Also, after the 2008 crisis, most governments changed bank rules to allow 'bail ins' so that next time, they can choke some losses onto depositors just like Cyprus sort of did.
Look up Bruce Whipple, he's been trained directly by the master of M&A Dan Pena
Yeah, you should do some research on Dan Pena... like this video: czcams.com/video/yXcHiNaxEsI/video.html
Question, I’m looking to buy a commercial building, but changing the business purpose. Can this formula be used as well for no money down?
The formula rarely ever works. See the top pinned comment. The last formulation has an error. even it doesn't work.
@@DavidCBarnett thx David! I truly appreciate your expertise and explanation.
I'll watch this later but I have 17k that's all I got if I wanted to buy a business so I could quit my job how could I do it never owned anything before is there a way I don't have a very rich friend I don't have great salesmanship experience how would someone like me start I live in Vermont not allot of opportunities here .
Get some sales and management experience before you quit your job and buy a business. If you don't know what you're doing, you can really mess up.
Great video, David. What if sellers' good will is 400k with 5% interest, bank loan is 150k and buyers investment is 50k? Would that go through with the bank?
Banks typically like to see a minimum debt to equity ratio, in this scenario, you may be able to split the seller note into two parts and have one note wait for payments until the bank gives the ok. This makes it act like equity. It's called a postponement.
Not sure I follow. In this case what would Debt/Equity ratio and DSC ratio be?
are there agents that can help me with this process? Like a realestate agents?
I help people analyze deals. There are brokers who work for sellers that will take you through the process... BUT- the assumption from every person is that if you're going to be doing business, you're a 'businessperson.' That means you have to be confident in your own skills and abilities. There are NO consumer protections in this world.
Hi David, So is this only for $0 money down that you wouldn’t recommend buying a business if you’re broke or would this also apply to someone who has saved $10K or $20K and wants to buy a small business for $100K with a SBA loan?
I also don't recommend putting all your cash into a deal. This video is intended to show how hard it might be. Also, I made an error in the last scenario, I forgot to include some of the debt service, so even the last scenario doesn't really work. see the top pinned comment.
Can this be applied outside the US without the local tax implications? I live in the UK for reference.
Not sure what you mean by local tax implications. You're facing income and maybe capital gains taxes in most countries. You'd need to run your idea past a local qualified accountant to find out where there may be tax liabilities and for which party. Also asset vs share deals have different implications in most countries.
Yes Danish - the principles David has described work in the UK. Happy to help you as I’m UK based.
How can I get your excel template that you used in the video?
It’s not a template. I just built it on the fly. If you want to develop skills for stuff like this, sign up for the cash flow forecasting program at www.BizPlanSchool.com
This was the video I was looking for. That said, I still do not understand this video: perhaps you can explain it. czcams.com/video/F8o1fZQ-Wlc/video.html. The first minute he talks about how he puts 15k down, and the seller financed 70k. What does that actually mean and how is that done?